*Stated simply – companies makeacquisitions in order to increase shareholder value. However, this increase does not come withevery acquisition. It only comes if theacquisition is successful. One thatthrough increases in sales and profits, enhances the shareholders’ investmentratios, with a prospect of continuing for a long time in the future.
Acquisitions are not successful by chance. They’re a product of a plan, one thatincludes prompt responses, a proper due diligence, management of thetransition, and an awareness of the important role the employees and customershave in the process. The plan alsoprovides for the buyer to stay in contact with the seller for many months (andyears) after the deal is consummated. The way the plan is executed will change many times as the successfulbuyer perfects the process.
Most of the acquisition activity in the security guard industry todayinvolves large financially qualified companies buying smaller, closely heldcompanies. Sometimes the seller hassales as small as one percent of the buyer’s. Some acquisitions are successful while others are not.
Here are seven habits of the successful buyers of closely held securityguard companies:
1.-Succesful buyers plan for the adquisition
Successful buyers do not buycompanies simply because they’re available. They buy according to the criteria established from a plan and they aredisciplined about sticking to it. Thisprevents the buyer’s decision-makers from reacting out of emotion, which wouldlikely result in an unsuccessful acquisition.
Theplan outlines the characteristics that they are looking for in an acquisitioncandidate. In general, thecharacteristics ensure that the seller’s philosophy is compatible with thepurchaser’s and that the business does not diminish the company’s profitabilityor standards.
Theplan specifically outlines the types of accounts that are acceptable; thegeographic area (city, state or country in the case of cross-bordertransactions) into which they want to expand; the price the buyers are willingto pay and the terms they will require – both dictated by their target returnon investment.
Also,an important part of the plan is having the financial, personnel and systemresources necessary to handle the acquisition and transition. This may require additional executive and/orclerical personnel if enough qualified people do not come over from the seller. It may also require upgrading the computersto handle the increase in payroll, billing and auxiliary reportingrequirements.
2 .-Successful buyers respond promptly
A very important aspect of successfulnegotiations is creating a deal momentum in the initial stages and keeping itgoing throughout the process.
Ifthe buyer prospect finds out about the seller through an intermediary, chancesare there are several other buyers being considered. For this reason, the successful buyer movesquickly but prudently. By doing this,the buyer is sending a message to the seller that it is very interested in thecompany. It doesn’t want to lose theopportunity to a competing buyer and it will get the deal done quickly. This is what the seller likes to see happen.
Successful buyers do not require allthe information on the seller before they decide to take the negotiations tothe next level. They promptly evaluatethe initial information and if interested, they communicate their interestorally and set up a get acquainted meeting with the seller. As soon as they have gathered enoughinformation to make an intelligent decision and have developed a rapport withthe seller, they make an oral offer, then promptly confirm it through a letterof intent. Their goal is to get anexclusive negotiating period by pushing their competitors aside, so the sellerswill not become distracted from competing offers.
The prudent buyer knows that even though the company may be off themarket for other buyer prospects, there is still one very large competitor inthe deal – the seller.
The buyer is now dealing with the seller’s emotions. If the process loses momentum, the sellerwill become impatient and have second thoughts about selling; this may cause theseller to terminate the negotiations.
3.-Successful buyers perform an adequate due diligence
Most buyers’ due diligence processesdo not fit the selling company. Theyexamine too much or not enough information because they take a “one duediligence list fits all” approach to their acquisition program.
Successful buyers, on the other hand,customize their due diligence process to fit the characteristics of theseller. They know that the due diligencefor a stock purchase has to be approached differently than one for an assetpurchase.
They prepare a list of the documents theyneed to examine, then send it to the seller far in advance of the due diligencedate. When the due diligence dayarrives, the process is expedited greatly by this advanced planning.
Successful buyers spend a lot of timeexamining the more important documents pertaining to profitability and risks –such as billing invoices, payroll registers, account contracts, post orders,employee files, etc. They also spend alot of time evaluating the managers and other employees who are needed afterthe acquisition. They spend less time(or no time) examining corporate charters and forecasts (which are usuallymeaningless for closely held companies).
Successful buyers do not expect accuratefinancials from the seller as a basis for determining the price. They recognize that small security guardcompanies can’t afford elaborate systems. The financials presented are often inaccurate because of impropermatching of revenue with expenses. Thebuyers overcome this by building their own financial model based on theirexperience in running similar operations.
And one of the most important aspects ofthe due diligence is its confidential treatment. If the seller is not ready to announ
ce thenegotiations, the buyer performs the document due diligence off-site or in theseller’s office at night after the clerical employees leave – so they will notbecome suspicious.
4.-Successful buyers pay a fair price
Paying a fair price does not meanoverpaying. It means giving the sellerits due, a move that will keep the seller motivated to help the buyer ifproblems or issues arise during the transition. An even more important reason is that it turns the seller into avaluable reference and ambassador for the buyer in future deals.
Successful buyers arrive at the price bygoing through a return on investment computation rather than using some streetformulas based on multiples of gross units (monthly billings, dollars perbillable hours, percentage of annual sales, etc.). The computation allows for a premium forquality accounts, good retention history and capable management, even if thepremium takes the pricing far in excess of what it would be by using some multipleof gross units method.
These buyers offer their best pricing inthe initial stages of negotiations. Theyare aware of the probable consequences of alienating the seller by submitting alow initial offer, then playing drawn out “guess what the price is” games inorder to find the seller’s real price level. They also know that they are probably competing with other buyerprospects and they do not want to lose the opportunity.
Successful buyers that intend to makeseveral acquisitions pursuant to some “roll-up” or “consolidation” plan knowthat their pricing and the way they conduct themselves during the negotiationsare important for future deals. Theirreputation as a good or bad buyer quickly spreads throughout the industry.
5.-Successful buyers manage the transition
Getting to the closing is just one step in a successfulacquisition. Another very major step isdeciding whether the seller’s operations will be integrated with the buyer’s orcontinue as a stand alone.
Regardless of the decision to integratethe companies, the customers and employees must be contacted before they hearabout the sale from the street rumor mill. Successful buyers quickly notify the employees and confirm theircontinued employment, pay rates and benefits. High-ranking executives of the buyer make themselves available to answerquestions from nervous employees.
The seller and a representative of thebuyer visit the most important clients quickly. They assure the accounts that there will be no changes in the service –the bill rates will not change and the present guards will continue at theaccount.
If the companies are to be integrated, theaccount billing and payroll processing information is promptly entered into thebuyer’s computers. The buyer knows thataccurate billing and paying the guards timely is essential in keeping anaccount satisfied. If the seller has anadequate system, the buyer may run the billing and payroll on this system for awhile after closing, then gradually make the change over.
As mentioned in some of the habits listedabove, the successful buyer keeps the seller involved after theacquisition. The seller, in mostinstances, has a relationship with the accounts. The seller can help to ensure a smooth transition.
6.-Successful buyers dealfairly with the sellers on post-closing issues
Most transactions provide for sometype of contingency to the seller receiving the entire purchase price. It may involve paying the seller for additionalbusiness brought in after the closing or an account retention condition. It’s impossible for a buy/sell agreement toaddress all the eventualities that may effect the computations.
This means that some aspects of thenegotiations may carry on past the closing. The buyer and seller may have to face each other again to resolve someof these issues. The seller has to relyon the buyer’s sense of fairness in dealing with these situations.
Successful buyers are very protective oftheir reputation in dealing fairly with sellers and how this reputation isspread throughout the industry through the “circle of influence”principle. This principle involves thewidening dissemination of a message from a few persons to many people. Here’s how it works: a satisfied seller tellstwo other seller prospects how he was treated in a deal. Each of these two prospects tell two otherprospects; each of these tell two other prospects – the message travelsexponentially. If the buyer mishandlessome post closing issues, the word spreads faster, and to more prospectivesellers. Negative stories spread morequickly and are harder to control than positive ones.
7.-Successful buyers respect theseller/intermediary relationshitp
Some buyers consider the seller’sintermediary as an unnecessary cost to the deal – which, although compensatedby the seller, is passed on to the buyer through an increased askingprice. Also, some buyers do not want aseller’s intermediary involved since they stand in the way of the buyer gettinga bargain by taking advantage of the seller’s inexperience in the acquisitionprocess.
The successful buyer on the other handrealizes that the intermediary has invested several months (or years)developing a relationship of trust with the sellers before they make thedecision to sell. The intermediary hasgone with them through the emotional decision-making periods.
The relationship cannot be duplicatedbetween the buyer and seller because the seller maintains a barrier of defensethat keeps the buyer from getting too close.
Theseller will be looking to the intermediary for advice on price, which will notbe a bargain, but will be realistic. Theseller will also solicit the intermediary’s advice on terms.
Successful buyers recognize this specialrelationship between the intermediary and his client/seller. And that through keeping the seller realisticon price and terms, and adding other valuable assistance to the
transaction, therelationship actually benefits both sides. Therefore, successful buyers make sure they go through the intermediaryto obtain information and set up the meetings.
Successful buyers want to be put on theintermediary’s preferred buyer list for future sellers the intermediary mayrepresent. To do this, the buyersrespect the seller/intermediary relationship.